11 April 2005

English Only

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

EFFECTS OF THE ‘EVERYTHING BUT ARMS’ INITIATIVE ON THE SUGAR INDUSTRIES OF THE LEAST DEVELOPED COUNTRIES

Report by the UNCTAD Secretariat

ABSTRACT This paper analyses the impact of the ‘Everything But Arms’ (EBA) initiative on the sugar industries of fourteen Least Developed Countries (LDCs) since it came into effect in 2001. It attempts to: (1) evaluate the extent to which LDCs benefit from the scheme; (2) explain why some countries have benefited or may benefit more than others; and (3) make policy suggestions concerning the characteristics of competitive LDC sugar industries. Static gains are analysed and it is found that the EBA provides support to fledgling export industries and can account for a large and stable share of total export earnings. In analysing dynamic gains, it is found that some LDCs are increasing sugar production significantly. It is hypothesized that increases in production are driven not by re-investment of financial gains from the EBA scheme to date, but by returns anticipated once duty and quota free access to the European Union (EU) is granted in 2009. Three cases are observed in which investment is provided by sugar producing firms based in non-EBA sugar exporting developing countries. The paper concludes by sketching a number of measures relevant to producers, policy-makers and investors in promising LDC sugar industries. UNCTAD/DITC/COM/2004/6

Disclaimer: The designations employed and the presentation of the material in this document do not imply the expression of any opinion whatsoever on the part of the secretariat of UNCTAD concerning the legal status of any country, territory, city or area, or of this authorities or concerning the definition of its frontiers or boundaries.

Leonela Santana Boado of the UNCTAD secretariat drafted this report. The author thanks Mike Hollis, Jesus Fernandez and Marijn Holwerda (UNCTAD) for their useful comments, suggestions and contributions. UNCTAD has a long history of work on trade preferences. Since the submission of the European Union initiative, it has published two major studies covering the issue: ‘Duty and Quota Free Market Access for LDCs: An Analysis of Quad Initiatives’, UNCTAD/DITC/TAB/Misc.7, prepared jointly by UNCTAD and Commonwealth Secretariats in 2001, and ‘The EU’s Everything But Arms Initiative and the Least-developed Countries’, prepared for a UNU-WIDER Meeting on the impact of WTO on Low-income Countries, Helsinki, 4-5 October 2002.

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CONTENTS Chapter Paragraph Overview 1-7 1: THE ‘EVERYTHING BUT ARMS’ (EBA) INITIATIVE

A. The present EU Sugar Regime 8-25 B. Proposed reforms to the EU Sugar Regime 26-52

2: EFFECTS OF THE EBA INITIATIVE

A. Sugar production and exports in 14 selected LDCs 53-61 B. Effects of the EBA on the LDCs 62-86 C. Effects of the EBA on non-EBA ACP countries 87-88

3: CASE STUDIES OF SELECTED LDCs

A. Natural resource endowments 89-107 B. Transport infrastructure 108-110 C. Competitive private investors 111-126

4: CHARACTERISTICS OF SUCCESSFUL PRODUCTION, POLICIES AND INVESTMENTS

A. Factors contributing to successful production 127-133 B. Factors contributing to successful policy interventions 134-144 C. Factors contributing to successful private investment 145-152

Annexes 1 Sudan 153-161 2 Ethiopia 162-171 3 Malawi 172-180 4 Zambia 181-192 5 Bangladesh 193-206 6 Tanzania 207-218 7 Mozambique 219-233 8 Uganda 234-249 9 Nepal 250-259 10 Myanmar 260-265 11 Senegal 266-269 12 DR Congo 270-273 13 Burkina Faso 274-277 14 Madagascar 278-283

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OVERVIEW

1. In March 2001, the European Commission adopted the ‘Everything But Arms’ (EBA) initiative to grant Least Developed Countries (LDCs) preferential access to the EU market. LDC sugar imports form part of the European Union (EU) sugar regime, which itself operates in the context of the Common Agricultural Policy (CAP). The workings of the regime are detailed in Chapter 1, Section A. The high, guaranteed price paid by the sugar regime is crucial to the success of the initiative since many LDCs are not at present highly competitive sugar exporters. The true value of preferential access over the longer term therefore lies in its ability to stimulate investment leading to increased efficiency, productivity and international competitiveness.1 By extending duty- and quota-free access to all goods except arms and ammunition, the EBA is consistent with the Millennium Development Goals (MDGs). While some LDCs are already significant exporters of sugar, as a group they are net importers. From 2009 each country will be able to export its entire local production to the EU (receiving above-world-market prices) and meet local sugar consumption needs through imports from the lower-priced world market.2 Reforms announced in July 2004 (and due to start in mid-2006, although delays are likely) are, however, likely to cut EU price levels by up to one-third and so disrupt this arrangement. 2. Section B discusses challenges to the EU sugar regime and some proposals for its reform. It argues that the value of the EBA is likely to be eroded, although at the time of writing it is not possible to say by what degree. Some likely implications for African, Caribbean and Pacific (ACP) and LDC exporters are outlined.

3. Chapter 2 contains the main findings of the paper. It focuses on the 14 LDCs that at present produce the greatest volumes of sugar, although only nine of the 14 were able to benefit from the EBA scheme in 2003/2004. The survey begins by analysing static gains and finds that the amount of foreign exchange earned by LDC sugar producers under the EBA initiative is small compared to net Official Development Assistance (ODA) at the national level. A different picture emerges when the amount of sugar exported under the EBA scheme is compared to total exports and exports under other preferential import initiatives. These comparisons allow identification of two distinct groups: those four countries for which the EBA quota accounts for a significant proportion of total exports (by volume) and those five for which it does not. The first group is composed of Ethiopia, Tanzania, Nepal and Burkina Faso; the second Sudan, Malawi, Zambia, Bangladesh, and Mozambique. It is argued that both groups benefit considerably from the high price paid to EBA sugar imports. The initiative therefore supports what is sometimes a fledgling export industry with little alternative preferential access in the first group and accounts for a large and stable share of total export earnings in the second. 4. In analysing dynamic gains, it is found that some countries are increasing sugar production volumes significantly. The paper hypothesizes that increases in production are driven not by re-investment of financial gains from the EBA scheme to date, but by returns anticipated once duty and quota access to the EU is granted in 2009. The countries increasing production most noticeably are Bangladesh, Mozambique and Tanzania. Tanzania and Mozambique have experienced significant investment by expanding Mauritian sugar companies, whereas Bangladesh is experiencing investment from a Thai sugar conglomerate.

1 The legal limitations of the EBA initiative must, however, be noted: as a unilateral, preferential measure it lacks the security that might be obtained were it placed in the context of concessions negotiated at the World Trade Organisation (WTO). 2 Association Des Organisations Professionnelles du Commerce des Sucres pour les Pays de l’Union Européenne (ASSUC), EBA – An Impact Assessment For The Sugar Sector, 25 January, 2001, http://www.sugartraders.co.uk/eba_impact_study.pdf.

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http://www.sugartraders.co.uk/eba_impact_study.pdf

It is suggested that the investing companies, all based in non-EBA sugar exporting countries, are investing in these LDCs with a view to taking advantage of EBA quota-free access in 2009. 5. The survey notes that different LDCs have adopted different routes to attracting FDI and stimulating domestic investment. These can be characterized broadly as privatization-liberalization and privatization-protectionism. While many LDCs have embarked on liberalising their economies, others have taken measures to protect local markets and any reduction of import barriers can be expected only after international competitiveness and profitability have increased. Thus, for example, Tanzania created in 2001 a Sugar Board to regulate and restrict imports. In 2000, Mozambique resisted International Monetary Fund (IMF) pressure to reduce import protection for its domestic industry. Finally, the Bangladeshi government increased in 2004 the price paid to domestic sugar producers in an attempt to stimulate production. While other LDCs have taken measures to protect their markets and not obtained FDI or productivity-enhancing local investment, the EBA initiative seems to have led to an ‘infant industry’ approach that has revived the sugar industry in the above-mentioned countries. Given the limited number of cases this study makes no attempt to judge whether openness or protection is the best way to further the development of LDC sugar industries. The finding to which attention is drawn is simply that the arrival of foreign companies is correlated with increases in the productivity, competitiveness and export orientation of certain LDC sugar industries.

6. Case studies of fourteen LDCs are provided in Chapter 3 to outline two factors affecting sugar industry export competitiveness: natural resource endowments and transport infrastructure. Section A gives data concerning production costs and Section B highlights the poor state of transportation infrastructure in many LDCs as one of the most serious constraints on the competitiveness of sugar exports. Some major sugar producing and exporting companies are discussed in Section C. Further details of the evolution of the sugar sector in the countries studied are given in the Annexes.

7. The paper concludes in Chapter 4 by sketching a number of measures relevant to policy makers, managers and investors in promising LDC sugar industries. Section A outlines some characteristics of efficient sugar production, including: large area under cultivation; access to irrigation; high daily processing capacity; and factory flexibility. Section B makes some recommendations concerning policy interventions likely to aid the development of the sector such as: careful privatisation; subsidies and tax incentives; and infrastructure development. Section C analyses factors contributing to successful private investment, including: financial strength, vertical integration and diversification.

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Chapter 1

THE ‘EVERYTHING BUT ARMS’ (EBA) INITIATIVE A. The present EU Sugar Trade Regime 8. In March 2001, the European Commission adopted the EBA initiative to grant LDCs preferential access to the EU market. With regard to sugar imports, the EBA initiative operates as part of the EU sugar regime and gradually introduces duty-free access to LDC raw sugar at guaranteed prices, which have at times been three times higher than those of the world market. 9. The EU sugar regime was introduced in 1968 and as part of the EU Common Agricultural Policy (CAP) it covers the production, processing and marketing of beet and cane sugar within the now 25 member States. The purpose of the regime is to protect EU sugar producers by insulating the EU market from the world market. The main elements of the regime are:

• Minimum support prices for sugar produced within the EU; • Quotas for EU beet sugar production assigned to each member State; • Export refunds or subsidies; • Preferential zero-tariff fixed quotas for raw sugar from those ACP countries

who are signatories to the Sugar Protocol of the Cotonou Agreement (successor to the Lomé Convention), supplemented by Special Preferential Sugar (SPS) arrangements;

• Incrementally increasing zero-tariff quotas for sugar from the least developed countries as part of the ‘Everything But Arms’ agreement, which is to be fully liberalized in July 2009.

10. EU sugar producers and the main ACP sugar exporters have, however, expressed concern about the EBA initiative. Both believe that LDC exports may damage their own production and/or exports. In order to understand these concerns, it is important to analyse the EBA in the context of the mechanisms regulating the EU sugar regime.

11. The EU sugar regime supports the EU sugar industry by first guaranteeing farmers high prices for selling their sugar beet to processors and then guaranteeing sugar processors a high price for selling their refined sugar. Minimum support or ‘target’ prices are established by the Common Market Organization (CMO) and fixed by the Council of Ministers on the basis of the production cost for a standard quality of sugar in the most efficient growing region. This target price is implemented by setting a minimum import price (threshold price) at a higher level and an intervention price for white and raw sugar at a lower level.

12. Under the Uruguay Round Agreement on Agriculture (URAA), the EU was obliged to replace the ad valorem import duties by fixed standard tariffs with a gradual reduction of standard tariffs by a total of 20 per cent in six years.3 However, the EU was not required to reduce its internal price support specifically for sugar under the URAA because domestic support is measured as the Aggregate Measurement of Support (AMS), aggregated across all commodities and policy instruments. Subsequently, the total reduction of 20 per cent over a period of six years for domestic support commitments refer to the total levels of support, but not to individual commodities. Overall, the sector wide domestic support for sugar has been high compared to the other agricultural commodities in the EU due to the high intervention price for sugar.

3 A 20 per cent reduction from a base rate of €524/t to the current €419/t in six annual steps.

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13. Production quotas are allocated in an attempt to prevent high guaranteed prices leading to surplus supply. Quotas for sugar A, which comprises 82 per cent of production and is intended solely for domestic consumption, and sugar B, which comprises 18 per cent of production and is intended for export (but incurs a levy to cover the difference between domestic and world market prices), are allocated to sugar processors on a country-by-country basis. Processors then licence beet farmers who receive the guaranteed price only for sugar produced under quota. 14. Every year, most of Europe’s excess sugar is disposed of in international markets (the rest is held as stocks). Production quotas and the requirement to export surpluses have ordered the relationship between supply and demand so that domestic prices for sugar have invariably remained higher than the support price, removing the need for producers to rely on institutional support. Much of the cost of the domestic system is therefore borne by EU consumers (who pay around three times more than the world market price).

15. When exported outside the EU, sugar produced under quota is granted a refund (or subsidy) roughly equal to the difference between the international and domestic (EU market) prices.4 Exporting surplus sugar with the support of export refunds appears to be a more attractive option for sugar producers than selling quota sugar to an intervention agency at the intervention price. Export refunds rather than the domestic support price have therefore constituted the main direct budgetary support for sugar producers. The cost of the regime amounted to almost €1.5 billion in 2002, making Europe’s farmers and processors the world’s biggest recipients of sugar subsidies. EU export totals have until recently included preferential raw sugar imports processed in the EU, which amounted to 1.9 million tones in 2003/2004. The EU typically exports at prices around one-third to one-half of the guaranteed internal price. 16. Non-quota sugar is produced because many farmers grow excess sugar beet. Member States are free to produce above quota levels but to avoid the negative impact that this out of quota sugar (called C sugar) might have on domestic prices, it must be entirely exported outside the EU market and, further, does not receive any support in term of export refunds. The high price for quota sugar constitutes, however, an implicit cross-subsidy and so non-quota sugar can often be exported profitably.

17. In the context of the WTO Agreement on Agriculture (AoA) and recognising the likely negative impact that subsidized exports might have in depressing international prices for sugar (outside the EU market), the EU has made commitments to reduce the total quantity of sugar that can be exported with the support of exports refunds and the total amount of export refunds involved when exporting refined sugar onto international markets.

18. Besides regulating the prices and quantities of sugar being produced within the Union, another pillar of the EU sugar regime to sustain internally high prices for sugar is a strict policy on imports. In 2004, tariffs reached €419/t. In addition, given the depressed international market prices for sugar during recent years, since 1995 the EU has made regular use of the Special Safeguard measure under Article 5 of the AoA, which allows the imposition of extra duty on sugar imports each time the c.i.f. price falls below a trigger price set at €531/t. The exact amount of such a duty is dependent upon the difference between the two prices.

19. The combination of these two duties renders importation of sugar possible only through preferential tariffs and quotas, with negligible importation of non-preferential sugar 4 Export refunds are equal to the intervention price plus the storage level, plus free-on-board (FOB) minus the world sugar price.

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occurring. The EU preferential trade regime on sugar consists of its Sugar Protocol with ACP countries and India (under which 1,294,700 tonnes of cane sugar from 19 ACP states are imported annually levy free). This fixed total is supplemented by Special Preferential Sugar (SPS) arrangements to cover the Maximum Supply Needs (MSN) of those member States with raw cane sugar refining industries. Since the accession of Finland in 1997, the EU also has a commitment to import around 79,000 tonnes from Cuba and Brazil under Most Favoured Nation (MFN) arrangements. Such raw sugar is subject to a reduced customs duty of €98 per tonne and its price is freely negotiated without the support of a minimum guaranteed price.

20. The Sugar Protocol was extended under the Cotonou Agreement of 2000, the successor to the Lomé IV Convention. Under the Sugar Protocol, the EU undertakes, for an indefinite period of time, to purchase and import on a duty-free basis and at a guaranteed price (similar to that paid to quota sugar) specific quantities of cane sugar (raw or white equivalent) originating from 19 ACP countries. Under the EC-India Agreement, similar treatment is provided to 10,000 tonnes of sugar from India per year.

21. The Special Preferential Sugar (SPS) quotas were created with a view to ensuring adequate supplies of raw sugar to a total of seven refineries in Portugal, the UK, Finland and France, where their forecast MSN cannot be met by alternative supplies of raw sugar.5 The SPS quotas are, however, to be absorbed by the EBA initiative. This means that rising imports of EBA sugar will be mirrored by reductions in SPS sugar from ACP countries.6

22. Under the terms of the EBA initiative, sugar (like bananas and rice) is considered a sensitive product and so at present each EBA beneficiary is assigned a quota for duty-free raw sugar imports. Full liberalization of the raw cane sugar market for LDC exporters will be phased in between 1 July 2006 and 1 July 2009 by gradually reducing the import tariff to zero and eliminating quantitative restrictions. In the meantime, LDC raw sugar can be exported duty free within the limits of a tariff quota, which will grow from 74,185 tonnes (white-sugar equivalent) in 2001/2002 to 197,355 tonnes in 2008/2009 (July to June marketing year).

Table 1.1: Tariffs and quotas for EBA sugar

July/June

year Tariffs on

non-quota sugar Quotas in tonnes

white sugar equivalent (w.s.e) 2001/2002 full duty 74,185 2002/2003 full duty 85,313 2003/2004 full duty 98,110 2004/2005 full duty 112,827 2005/2006 full duty 129,751 2006/2007 20% duty reduction 149,213 2007/2008 50% duty reduction 171,595 2008/2009 80% duty reduction 197,335

5 MSN are met by community sugar; preferential sugar (ACP and EBA); MFN sugar; and that available from the French Overseas Departments (FOD). Where this total does not equal the MSN, additional duty-free (or highly reduced) tariff quotas are created: the SPS, for which EU refineries are obliged to pay a minimum purchase equal to the guaranteed price. The SPS quotas have remained fairly constant over time because: (1) the above sources produce to fixed quotas (with the exception of the FOD, for which output varies little) and (2) refinery capacity is fixed. 6 Four LDCs eligible to export sugar under the EBA initiative (Malawi, Tanzania, Uganda and Madagascar) already enjoy preferences under the ACP Sugar Protocol, although at present only Malawi and Tanzania possess EBA quotas.

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23. The EBA initiative can be considered a form of Official Development Assistance (ODA) and is in value terms the most important of the developed country preferential access schemes for LDC imports. The benefit of the EBA initiative to LDCs is predictability in an otherwise volatile trading environment and the opportunity to earn scarce foreign exchange. It scores positively on reaching Target 13 of the Millennium Development Goals, which calls on nations to ‘address the special needs of the least developed countries.’ Progress indicators 38 and 39 refer respectively to the ‘proportion of total developed country imports (by value and excluding arms) from developing countries and from least developed countries, admitted free of duty’ and ‘average tariffs imposed by developed countries on agricultural products and textiles and clothing from developing countries’. The present scheme does not, however, address the issue of tariff escalation on imports of value-added processed sugar and products containing processed sugar (such as canned pineapples or the molasses used in animal feed). Duties on such imports remain fixed at €419/t and in 2003/2004 attracted a further ‘Special Safeguard’ levy of €90/t; annulling any competitive edge that the LDCs may have in the processing industries.

24. Applications for licences to import raw sugar from LDCs within the stated limits have to be submitted directly by the EU refineries. The EU guarantees that the refiners pay a minimum purchases price for this sugar, equal to the intervention price with some adjustments. Until 2006, the price paid by EU refineries to LDCs for the EBA sugar is similar to that paid for the SPS (€496.80/t c.i.f. European port). The price is slightly lower than that paid for sugar under the ACP Sugar Protocol (€523.70/t) because suppliers of SPS and EBA sugar remain responsible for the refining aid (€26.90/t).

25. The sugar regime is normally reviewed every five years. In November 2004, however, the Council of Ministers began examining the current regime independently of the ongoing CAP mid-term review and earlier than the planned date of 2006. The Council is expected to report on the subject in 2005. The reasons for this change are explained in Section B.

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B. Proposed reforms to the EU sugar regime 26. The EU sugar regime has remained largely unaltered since its inception in 1968. At present it fails to meet several of its own objectives and has come under increasing pressure for reform from both inside and outside the EU. Various proposals for change are examined in this section, which focuses primarily on those made by the European Commission in July 2004. Discussion of the Commission proposal began in earnest in late November and the Council is expected to draw up a review in early 2005. 27. The quota and price support system encourages systematic over-production in the EU. This has several negative consequences, as outlined below.

• Costs are increased. In 2002, export refunds from the EU budget amounted to €1.493bn.7 Consumers pay around €8bn more annually than they would in the absence of price support, or €64 for every family in the EU.8

• Surplus production places a strain on the environment, as sugar beet production requires three times more water than wheat.

• The system has failed to safeguard EU jobs. Over the last decade the sector has shed around 17,000 industry-related jobs. While there were 240 sugar mills in the EU in 1990, just 135 were left in 2001.9

• The most contentious issue arising from surplus production is that of C sugar, which from 1996/1997 to 2000/2001 constituted 23 per cent of UK production.10 All such sugar must be exported, which in 1999/2000 entailed the sale of some 3.4 million tonnes, compared to less than 1.5 million tonnes of surplus A and B sugar. Surplus production and C sugar exports are often blamed for precluding increases in preferential ACP and EBA imports; contributing to the depression of world prices; and diminishing South-South trade.

28. Domestic and international pressure for reform of the Sugar Regime has been increasing steadily and the apparent lack of progress precipitated the launch of a legal challenge by Brazil, Thailand and Australia. In September 2004, a Dispute Settlement panel of the WTO upheld their contention that subsidies for A and B sugar indirectly subsidize the production and export of C sugar. The panel also declared that in subsidizing the processing and consequent re-export of ACP and EBA preferential imports the EU is in violation of Uruguay Round commitments to reduce subsidized exports to no more than one million tonnes per annum. At present, the EU does not include refined exports of preferential ACP and EBA sugar imports in the totals for exports in receipt of subsidies, although export refunds are in fact paid to around 1.6 million tonnes of such sugar.11 It has been suggested that these two rulings could together lead to the removal of up to three million tonnes of subsidized EU sugar exports from the world market.12

7 Executive Brief: The Basic Sugar Regime, CTA, January 2004, http://agritrade.cta.int/sugar/executive_brief.htm. 8 ‘Dumping on the world: How EU sugar policies hurt poor countries’, Oxfam Briefing Paper, No. 61, Oxford: Oxfam GB, March, 2004, http://www.oxfam.org/eng/pdfs/bp61_sugar_dumping.pdf, p.12. 9 Press Release, ‘Sugar: Commission proposes more market-, consumer- and trade-friendly regime’, IP/04/915, Brussels, 14 July 2004, http://www.europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/915&format=HTML&aged=0&language=EN&guiLanguage=en . 10 ‘Submission to the DEFRA Consultation on Sugar Reform’, Action Aid, Cafod and Oxfam UK, January 2004, http://www.cafod.org.uk/var/storage/original/application/php0s6Mes.pdf, p.5. 11 European Union: Sugar Regime Under Pressure, Oxford Analytica, 12th August, 2004, http://www.oxan.com/db/item.asp?StoryDate=20040812&ProductCode=OADB&StoryNumber=1 . 12 http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,date:09-09-2004~menuPK:278083~pagePK:34392~piPK:34427~theSitePK:4607,00.html#Story4.

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http://agritrade.cta.int/sugar/executive_brief.htmhttp://www.europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/915&format=HTML&aged=0&language=EN&guiLanguage=enhttp://www.europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/915&format=HTML&aged=0&language=EN&guiLanguage=enhttp://www.cafod.org.uk/var/storage/original/application/php0s6Mes.pdfhttp://www.oxan.com/db/item.asp?StoryDate=20040812&ProductCode=OADB&StoryNumber=1

29. In light of mounting pressures various proposals for reform have been put forward. These can be broken down into the four main options listed below.13 In what follows emphasis is placed on how the reforms might affect the LDCs.

1. Market liberalization. 2. Maintaining the status quo. 3. Reduction in quotas. 4. Reduction in price.

30. The first option of market liberalization and effective dismantling of the Sugar Regime finds little support from LDCs and EU producers as it would mean an almost complete displacement of production and exports by more competitive countries such as Brazil, Thailand and Australia. The cost of compensating EU growers would also be prohibitive. 31. The second option of maintaining the status quo is likely to receive little support in Europe as it would entail large cuts in production. This is principally the result of the WTO ruling, which requires the EU to achieve equilibrium between preferential imports, production and consumption and thereby reduce subsidized exports. A large increase in imports is anticipated from 1 July 2009, when quotas are lifted on EBA sugar, because of the high prevailing guaranteed prices in the EU. In order to accommodate these imports without exceeding consumption levels and permitted export limits, EU production would have to be cut significantly. The only way around this problem would be to ignore the WTO ruling or re-impose quotas on the EBA countries. 32. The third option of reducing quotas is that favoured by the LDC countries themselves.14 They propose to defer the complete liberalisation of the tariff and quota system until 2019, on the condition that their 2004/2005 quotas are increased from 112,827 tonnes to 466,033 tonnes (reaching a maximum of 1,425,606 tonnes in 2012/2013) and that the high prices paid to producers are preserved close to current levels. Measures would be taken to respect rules of origin and so combat abuse of the quotas and there should be no impact on imports from the ACP countries. In capping EBA country imports, EU production would continue, although domestic quotas would need to be cut to around 13 million tonnes per annum. 33. The fourth option of a fall in the guaranteed price paid to producers received the most attention in the Commission Staff Paper. This would consist of a phased process, which would lead to a new market balance and result in the redundancy and eventual abolition of the quota system in the EU by 2013. The proportion by which the price would have to fall to make the EU sugar regime WTO-consistent depends on a variety of factors, although a 40 per cent reduction has been suggested. The price reduction process would involve several stages and for the period in which the quota system still operated quotas would have to be cut so as to discourage production of surplus C sugar. The Commission suggested imposing obligations to restrict the production of C sugar. The guaranteed price for preferential sugar, applicable only to sugar covered by the ACP Protocol and the Agreement with India, would also be cut (as would the refining aid) in the same proportions as the margins for sugar beet growers. This would mean a fall to around €290/t. The impact on ACP countries could therefore be expected to be significant, as would the cost of a compensation package to the EU budget. No reference is made to the EBA countries, although the effects of a price cut could be expected to be similar. Imports after restructuring is complete would total around 2.5 million tonnes with exports predicted to fall close to zero.

13 ‘Reforming the European Union’s sugar policy: Summary of impact assessment work’, Commission Staff Working Paper, September 2003. 14 Press Release, LDC Brussels Sugar Group, 3 March 2004.

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34. The European Commission published a second paper on 14 July 2004 entitled ‘Accomplishing a sustainable agricultural model for Europe through the reformed CAP – sugar sector reform’.15 The paper develops further the idea of a fall in price option for reform of the EU sugar regime. 35. EU sugar production, refining and exporting would continue but the package is intended to reduce distortions in both the EU and world markets. The latest proposal focuses on reductions in price support and quotas and so has two main parts: 36. Price cuts: Abolition of the ‘intervention price’ of €632 paid to factories for every tonne of sugar produced. Taking 2003/4 as the base year, it will be superseded by a ‘reference price’ of €421/t, achieved in two steps over three years (a total cut of 33 per cent). In parallel, European sugar beet farmers will see their payments cut from €43.6/t to €27.4/t in 2007/8 (a total of 37 per cent). 37. Quota cuts: Reduction in the EU production quota by 2.8 million tonnes (from 17.4 million tonnes to 14.6 million tonnes) over four years, beginning in 2005. This is intended to bring production into line with consumption and so remove the need for export subsidies. 38. In 2003/2004 Europe consumed 16.3 million tonnes and produced 17.3 million tonnes of ‘A’ and ‘B’ quota sugar. Imports, almost all of which occur through preferential quotas, totalled almost 1.9 million tonnes in 2003/2004. This creates a ‘structural surplus’ of nearly 2.9 million tonnes, which has to be disposed of on world markets in order to maintain high prices within the EU. The Commission claims that cuts in quota production will lead to reductions in the amount of subsidised exports by around two million tonnes and, as the EU market reaches equilibrium, the eventual elimination of exports. This should cause world market prices to rise, with one model predicting an increase of 20-23 per cent.16 39. The July 2004 proposal makes few direct references to C sugar. The 2003 Commission Staff Paper suggestion to oblige producers to restrict production does not reappear in the latest Communication. EU success in tackling this problem depends ultimately on the manner in which reform proceeds. It is a question of; (1) discouraging growers from exceeding their quotas (this is where restrictions might be imposed); and (2) whether the reduced payments to factories will cover the fixed and variable costs of producing in-quota sugar and still allow them to produce C sugar at a marginal cost lower than the world price (plus freight and insurance costs); that is, profitably.17 It is not possible at this stage to predict whether the proposed reference price of €421/t and the quota of 14.6 million tonnes that would come into effect in 2008/2009 would allow C sugar to be produced profitably, since much depends on the efficiency of and quota allocated to each individual factory. 40. In addition, the Commission proposes to compensate EU producers for the loss of income entailed by the scheme. To this end, they will be offered direct support amounting to 60 per cent of projected losses. This will cost the EU budget approximately €1.340bn per annum.

15 'Accomplishing a sustainable agricultural model for Europe through the reformed CAP – sugar sector reform', Communication from the Commission to the Council and the European Parliament, Brussels, 14.7.2004 COM (2004) 499 final, http://europa.eu.int/comm/agriculture/capreform/sugarprop_en.pdf. 16 ‘Dumping on the world: How EU sugar policies hurt poor countries’, Oxfam Briefing Paper, No. 61, Oxford: Oxfam GB, March, 2004, http://www.oxfam.org/eng/pdfs/bp61_sugar_dumping.pdf, p.28, citing (footnote 54) B. Borrell and L. Hubbard (2000). 17 Executive Brief: The Basic Sugar Regime, CTA, January 2004, http://agritrade.cta.int/sugar/executive_brief.htm

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41. Reductions in price support mean that some regions of the EU will be unable to continue producing competitively. To assist the rationalisation of the market, the Commission proposes that quotas should be tradable between Member States. 42. Factories that will be unable to continue operating will be offered compensatory support, amounting to €250/t of sugar processed under quota by the beneficiary. 43. Some elements of the proposals relate specifically to ACP and EBA countries. The Commission is committed to buying 1.3 million tonnes of white sugar equivalent (w.s.e.) from the ACP countries and India. Under the terms of the proposal, however, this commitment would have to be fulfilled at a lower price, equal to the suggested EU reference price of €421/t. At this price level, the implied raw sugar price would be €329/t, a level indicating that the refining aid would no longer be needed for refiners and would thus be repealed. 44. The phased increase in LDC sugar imports under the EBA initiative would remain unaffected. To avoid distortion of competition, EU operators would continue to be compelled to buy EBA sugar at a price no lower than the guaranteed price for ACP and Indian sugar. 45. Given that the ACP SPS sugar quota is already being absorbed by the EBA initiative, the MSN instrument would in time no longer be needed. 46. Preferential access has provided the ACP countries with over €500 million more annually than they would have earned on the world market.18 This situation is set to change dramatically. Reform could have a variety of effects on ACP and EBA countries, some of which are outlined below. 47. Income gains: As the EU exports progressively less sugar, developing country exporters may achieve some gains through rising world prices and the opening of third country markets previously dominated by EU exports. In 2001, for example, Europe exported 770,000 tonnes of white sugar to Algeria and 150,000 tonnes to Nigeria – countries that would be potential export markets for competitive African exporters like Malawi, Zambia or Mozambique.19 Conversely, if world market prices rise, net sugar importers will lose out. This will have harmful consequences for LDC processors who use sugar as an input in the production of, for example, soft drinks and confectionary. 48. Income losses: The projected loss of income for ACP exporters after price cuts will be in the order of €23.1 million for Jamaica, €95.6 million for Mauritius, €7.8 million for Belize and €4.1 million for Malawi.20 The EBA 2008/9 quota of 197,335 tonnes would be worth over €98 million at the current price of €496.80/t (although this price is fixed only until 2006). If the price is reduced to €329/t, their earnings will decrease to just below €65 million. 49. Competitive difficulties: Estimates for income losses assume that the above-mentioned countries will continue to meet their full quotas. This may not be possible for high cost ACP producers such as Mauritius and Jamaica, who may be unable to continue supplying the European market at the reduced price. A similar problem will affect numerous LDCs, in particular the less competitive nations of Bangladesh, Madagascar and Uganda.

18 ‘Submission to the DEFRA Consultation on Sugar Reform’, Action Aid, Cafod and Oxfam UK, January 2004, http://www.cafod.org.uk/var/storage/original/application/php0s6Mes.pdf, p.6. 19 ‘Submission to the DEFRA Consultation on Sugar Reform’, Action Aid, Cafod and Oxfam UK, January 2004, http://www.cafod.org.uk/var/storage/original/application/php0s6Mes.pdf, p.3. 20 ‘Comments on the EC Communication…’ Agritrade News Alert 27th July 2004, http://agritrade.cta.int/alert040727-sugar.htm.

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50. Low or stagnant export growth to the EU: The abolition of the MSN and SPS schemes and the fixing of the ACP Sugar Protocol quotas at 1.3 million tonnes per annum mean that additional imports will come primarily from the EBA countries. Despite large production quota cuts from 17.4 million tonnes to 14.6 million tonnes, total imports are forecast to increase by only 0.6 million tonnes, from 1.8 to 2.4 million tonnes.21 51. Adjustment assistance: The Commission recognizes that these measures will impose difficulties on the ACP countries, and so proposes entering into dialogue concerning adjustment assistance, including the establishment of programmes that focus on improving the competitiveness of the sugar sector where economically viable, and on supporting diversification where improvements in competitiveness in the sugar sector are not sustainable. The proposed reforms do not mention the issue of tariff escalation on imports of ACP and LDC processed sugar and so fall short of addressing this point. 52. On a final note, the Seventh Session of the ACP-EU Joint Parliamentary mission took place in Addis-Ababa (Ethiopia) from 16 to 19 February 2004. Adopted was a ‘Resolution on cotton and other commodities: problems encountered by ACP States’. Referring to trade in commodities, the resolution regretted 'that most developing countries have not benefited from added value either through processing basic commodities or from diversification to high-value cash crops'; and 'called on the Commission to promote the development of agro-industry in these countries and to encourage economic diversification and product processing of cotton, sugar and other commodities'.22

21 ‘Comments on the EC Communication…’, Agritrade News Alert 27 July 2004, http://agritrade.cta.int/alert040727-sugar.htm. 22 http://www.europarl.eu.int/intcoop/acp/60_07/pdf/resolution04_en.pdf

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Chapter 2

EFFECTS OF THE EBA INITIATIVE A. Sugar production and exports in 14 selected LDCs 53. In 2004, world sugar production totalled 140 millions tonnes and world exports 45 million tonnes. The seven bigger producers: Brazil, India, the EU, China, USA, Thailand and Australia, together produced 92 million tonnes, around 65 per cent of world production. The four biggest exporters: Brazil, Thailand, the EU and Australia exported nearly 30 million tonnes, around 65 per cent of world exports. LDC sugar production is currently around 3 million tonnes and exports to the world market total around half a million tonnes. The 50 LDCs thus do not influence the world sugar market in any significant way.23

54. Of the 50 LDCs, 35 are net sugar importers with either a small or non-existent sugar sector. In 2001, the EBA Sugar Working group and the LDC Commercial Group on EBA Sugar selected 25 countries for future EBA sugar deliveries.24 This paper discusses only countries with a minimum annual production of 20,000 tonnes between 2000 and 2002 and so refers to 14 nations that have the potential to increase considerably their annual sugar production and hence exports to EU. Those countries are Bangladesh, Burkina Faso, Democratic Republic of Congo, Ethiopia, Madagascar, Malawi, Mozambique, Myanmar, Nepal, Senegal, Sudan, Tanzania, Uganda, and Zambia. It should be noted, however, that for the July-June marketing year 2003/2004, five of the fourteen countries have no quota allotted to them: Democratic Republic of Congo, Madagascar, Myanmar, Senegal and Uganda.

55. In 2002, Sudanese sugar production totalled 743,554 tonnes, more than 2.5 times more than its closest rival Ethiopia, which produced 286,898 tonnes. With regard to exports, however, Sudan sold only 22.4 per cent of the national produce (166,802 tonnes); around half the proportion achieved by Zambia (43.8 per cent; 102,033 of 232,755 tonnes). Between 2000 and 2002, Mozambican sugar production has multiplied by nearly four times while the increase in Sudanese production was only 10 per cent. These figures demonstrate that the fourteen countries selected for this study can show wide differences in production, production growth rates and absolute and relative volumes and values of exports. As such, the impact of the EBA Agreement should be expected to vary from country to country. 56. The following paragraphs present data on production and exports (in tabular and graphical form) and the evolution of the EBA quota, in aggregate and by country.

23 There are 50 LDCs on the United Nations list; 41 are ACP countries. The ACP LDCs are: Angola, Benin, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, Timor Leste, Equatorial Guinea, Ethiopia, Eritrea, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Liberia, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Samoa, Sao Tomé and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Zambia, Tanzania, Togo, Tuvalu, Uganda and Vanuatu. The nine non-ACP LDCs are: Afghanistan, Bangladesh, Bhutan, Cambodia, Laos, Maldives, Myanmar, Nepal and Yemen. 24 International Sugar Organization, ‘EBA: Implications for the World Sugar Market’, November 2002.

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Table 1.2: Production and exports by country of origin (tonnes, w.s.e) (ranked by 2002 total production volumes)

Total production Total exports

2000 2001 2002 2000 2001 2002

ProductionForecast by

2009

1 Sudan 679,850 718,831 743,554 57,801 159,653 166,802 1,700,000

2 Ethiopia 250,869 305,000 286,898 64,652 50,000 87,137 275,000

3 Malawi 208,804 205,000 260,617 64,890 71,937 81,293 NA

4 Zambia 190,000 199,278 232,755 47,191 132,125 102,033 NA

5 Bangladesh 110,000 109,130 228,928 - - - NA

6 Tanzania 130,000 115,000 186,538 17,375 14,105 22,643 440,000

7 Mozambique 45,000 e 60,000 e 170,000 e 26,065 37,045 55,332 300,000

8 Uganda 130,000 140,000 160,000 - - - NA

9 Nepal 110,000 e 65,000 e 110,000 e - - - NA

10 Myanmar 75,000 125,000 e 100,000 e 2,922 33,213 11,822 NA

11 Senegal 90,000 e 95,000 e 95,000 e - - - NA

12 DR Congo 75,000 60,000 65,000 - - - NA

13 Burkina Faso 30,000 e 35,000 e 40,000 e 160 5 7,538 NA

14 Madagascar 70,000 50,000 32,253 24,765 21,981 1,481 NA

Source: International Sugar Organization (ISO), Statistical Bulletin, October 2003.

Table 1.3: Total production 2000-2002 (tonnes, w.s.e)

0

100'000

200'000

300'000

400'000

500'000

600'000

700'000

800'000

Suda

n

Ethio

pia

Malaw

i

Zamb

ia

Bang

lades

h

Tanz

ania

Moza

mbiqu

e

Ugan

daNe

pal

Myan

mar

Sene

gal

DR C

ongo

Burki

na Fa

so

Mada

gasc

ar

2000

2001

2002

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Table 1.4: Total exports 2000-2002 (tonnes w.s.e)

0

20'000

40'000

60'000

80'000

100'000

120'000

140'000

160'000

180'000

Suda

n

Ethio

pia

Malaw

i

Zamb

ia

Bang

lades

h

Tanz

ania

Moza

mbiqu

e

Ugan

daNe

pal

Myan

mar

Sene

gal

DR C

ongo

Burki

na Fa

so

Mada

gasc

ar

2000

2001

2002

Source: International Sugar Organization (ISO), Statistical Bulletin, October 2003.

57. Implementation of duty and quota free access to the European market for LDC raw cane sugar will occur between 2001 and 2009. The duty-free quota increases by 15 per cent each year with tariff reduction on non-quota sugar beginning in 2006. The quota allows only for the importation of raw sugar for refining in the EU. 58. Those LDC countries wishing to participate in the EBA initiative are required to register their intention to supply sugar to the EU with the EBA Sugar Working group. In both 2001/2002 and 2002/2003 the quota was fully filled. 59. Every year the total EBA sugar quota is distributed between the registered countries according to the following formula:

- One-third of the total is distributed equally between all participants; - One-third is divided pro rata to the volume of sugar produced in the most recent

October/September crop cycle; and - One-third is divided in inverse ratio to GNP per capita.

60. The total quota is set to increase by 15 per cent per annum but the entry of new suppliers and the distribution formula means that the quota for each country increases at variable rates. Table 1.5 shows that Sudan has the highest quota and export volumes of the group selected. From 2001 to 2003, however, its quota increased by less than 5 per cent due to the entry of Nepal. In 2003/2004, its quota even decreased from the previous year. Of the fourteen countries studied only nine benefited in 2003/2004 from an EBA sugar quota.

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Table 1.5: Deliveries of EBA sugar to the EU (tonnes, w.s.e)

LDC sugar producing country 2001/2002 2002/2003 2003/2004 actual actual scheduled Sudan 16,257 17,037 16,979 Ethiopia 14,298 14,689 15,249 Malawi 10,402 10,661 10,959 Zambia 8,758 9,017 9,538 Bangladesh No quota No quota 8,989 Tanzania 9,065 9,317 9,940 Mozambique 8,331 8,384 10,116 Nepal No quota 8,970 8,667 Burkina Faso 7,073 7,237 7,672 Total 74,185 85,313 98,110

Source: http://www.sugartraders.co.uk/ebastats.htm, Marketing years extend from July-June.

61. Having described the basic operation of the EBA initiative it is now possible to analyse its static and dynamic effects.

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B. Effects of the EBA initiative on LDCs

62. Our analysis of the effects of the EBA sugar import initiative begins with the static financial gains to date, that is, the value of the EBA quota. To assist the evaluation of the extent to which the LDCs benefit from the scheme, gains from the EBA are compared to total ODA flows to each country.

Table 1.6: Comparison of EBA quota value and total ODA flows in selected LDCs

Country

EBA quota value in

million US$, 2002/3

Total ODA flows in

million US$, 2002

1 Sudan 8.1 351 2 Ethiopia 6.9 1,307 3 Malawi 5.0 377 4 Zambia 4.3 641 5 Bangladesh No quota 913 6 UR Tanzania 4.4 1,233 7 Mozambique 3.9 2,058 8 Uganda No quota 638 9 Nepal 4.3 365

10 Myanmar No quota 121 11 Senegal No quota 449 12 DR of Congo No quota 807 13 Burkina Faso 3.4 473 14 Madagascar No quota 373 Total 40.3 10,106

Source: Secretariat calculations, and for ODA flows, OECD, Aid Recipient Charts

http://www.oecd.org/countrylist/0,2578,en_2825_495602_25602317_1_1_1_1,00.html#b.

63. For all countries studied, the amount of foreign exchange earned through the EBA scheme is insignificant compared to net ODA. This suggests that if there are benefits to be found then it is at the sectoral level, in comparison with: (1) volumes exported to the world market; and (2) to other preferential access schemes. The following sections conflate the two comparisons for brevity and clarity. 64. Table 1.7 indicates the total amount of preferential quotas allocated to each country to allow comparison of the importance of the EBA relative to other preferential import schemes.

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Table 1.7: Selected preferential LDC quotas for 2002-2003 (tonnes, w.s.e.)

EBA quota ACP quota SPS quota Tariff-rate quota, USA

1 Sudan 17,037 No quota No quota No quota 2 Ethiopia 14,689 No quota No quota No quota 3 Malawi 10,661 20,824 9,897 10,530 4 Zambia 9,017 No quota 12,862 No quota 5 Bangladesh No quota No quota No quota No quota 6 UR Tanzania 9,317 10,186 2,182 No quota 7 Mozambique 8,384 No quota No quota 13,690 8 Uganda No quota No quota No quota No quota 9 Nepal 8,970 No quota No quota No quota

10 Myanmar No quota No quota No quota No quota 11 Senegal No quota No quota No quota No quota 12 DR of Congo No quota 10,186 2,249 7,258 13 Burkina Faso 7,238 No quota No quota No quota 14 Madagascar No quota 10,760 No quota 7,258 Others No quota 1,242,744 190,107 1,078,459 Total 85,313 1,294,700 217,298 1,117,195

65. While there is considerable variation between export volumes, examination of the proportion of EBA and non-EBA exports to total exports of sugar over the last four years (Table 1.8 below) allows identification of two distinct groups.

Table 1.8: Selected preferential LDC quotas as a percentage of total exports

EBA quota as percentage of total

exports Non-EBA preferential quotas as

percentage of total exports 01/2002 02/2003 03/2004 01/2003 02/2003 03/2004 Sudan 9 11 8 No quotas No quotas No quotas Ethiopia 18 45 26 No quotas No quotas No quotas Malawi 14 10 11 55 39 *39 Zambia 7 8 8 11 11 11 Bangladesh No quota No quota 14 No quotas No quotas No quotas Tanzania 43 43 44 57 57 *56 Mozambique 17 12 9 27 20 13 Nepal No quota 90 87 No quotas No quotas No quotas Burkina Faso 100 100 N/A No quotas No quotas No quotas *Scheduled Source: ISO, ‘Quarterly Market Outlook’, September 2002-September 2004. 66. The first group is composed of Ethiopia, Tanzania, Nepal and Burkina Faso. The proportion of sugar exported through the EBA initiative relative to total exports is large. In the Ethiopian case, the EBA quota represents more or less a third of total exports while the rest is not exported under any kind of preferential scheme. Just under half of Tanzanian exports are absorbed by the EBA arrangement while the other half goes to alternative preferential quota schemes. For Nepal and Burkina Faso, the EBA quota accounts for all or almost all of their exports and they have no other preferential import arrangements. The high guaranteed prices paid to these countries under the EBA initiative thus provide relatively stable support for the continuation of their sugar export industries, support which is all the

20

more important considering that only Tanzania has alternative preferential import scheme arrangements; the other three are almost completely dependent on the EBA for export sales.

67. The second group is composed of Sudan, Malawi, Zambia, Bangladesh, and Mozambique. The EBA quota forms a much smaller proportion of total exports than in the case of the first group. Sudan, Malawi and Zambia are among the most competitive sugar producers of all LDCs (see Chapter 3, Section A) and so the observation that their total exports vastly exceed their EBA quota is not unexpected. Malawi is, however, something of an anomaly in that while the EBA quota constitutes only 10 per cent of its total exports, it also benefits from the ACP and SPS preferential import schemes. In addition, Malawi receives a US tariff-rate quota and so around half its sugar exports are sold under some kind of preferential import scheme. Yet again, the high price paid to EBA sugar is significant to the sector as a whole: while the EBA quota represents only 10 per cent of Sudanese sugar exports by volume, if it is considered that such sugar receives around three times the world market price then it represents by value 25 per cent of Sudanese sugar exports.

68. Displaying the value of current EBA exports relative to total exports and total ODA does not, however, fully capture the economic effects of the EBA initiative. Perhaps more important are the dynamic effects of the programme, i.e. the extent to which it creates observable trends that can be projected into the future. One such dynamic is a sustained increase in sugar production since the announcement of the EBA initiative. It is quite possible that in some countries this process is driven not by re-investment of financial gains from the EBA initiative to date, but by the returns anticipated once duty and quota access to the EU is granted in 2009. 69. This possibility appears most clearly in examination of crop year statistics, which can differ considerably from marketing year statistics (Table 1.9). When this table is analysed in conjunction with other evidence a grouping emerges that may clarify the dynamic benefits of the EBA initiative.

Table 1.9: Selected LDC production and exports by crop year (October-September, thousand tonnes, w.s.e)

Production Exports 2000/01 2001/02 2002/03 2003/04 2000/01 2001/02 2002/03 2003/04 Sudan 773 750 714 780 53 180 150 205 Ethiopia 300 305 290 300 55 80 33 60 Malawi 205 255 260 255 70 75 105 105 Zambia 195 203 225 225 110 120 120 115 Bangladesh 105 195 190 120 0 0 10 65 Tanzania 115 170 195 220 15 20 20 25 Mozambique 55 125 200 260 30 50 70 110 Nepal 70 100 125 115 0 0 10 10 Burkina Faso 32 35 40 40 0 5 7 N/A

Source: ISO, ‘Quarterly Market Outlook’, September 2002-September 2004. 70. It can be seen from this data that three LDCs are linked by two factors: increase in production volumes and the arrival of foreign companies. Firstly, production has grown regularly in Tanzania and Mozambique over the last four years, almost doubling in the former and more than quadrupling in the latter. Production has also increased in Bangladesh, although the damaging floods of 2003 hampered expansion. These increases require explanation.

21

71. Secondly, Bangladesh, Tanzania and Mozambique have all experienced increased FDI in their sugar industries since the announcement of the EBA initiative in 2001. In Bangladesh, an abandoned state-owned processing plant has recently been re-opened after privatisation and joint investment by a Bangladeshi and a Thai sugar conglomerate.25 Tanzania and Mozambique, for their part, are two countries in which expanding Mauritian sugar companies have made significant investments (see Annexes 5, 6 and 7). 72. One explanation of why Mauritian sugar companies invest abroad is that costs of production are lower. This does not apply to Bangladesh, however, which is at present a higher cost producer than Thailand. A more parsimonious explanation for the correlation between increasing production volumes and the activities of foreign companies makes reference to one overriding economic incentive: in 2009 Bangladesh, Mozambique and Tanzania will enjoy duty and quota free access to European markets while Thailand and Mauritius will not. 73. The distinction between effects to date and anticipation of future gains makes it arguable that since its inception in 2001, the EBA initiative has contributed to the growth of the sugar industry in Malawi, Mozambique, Sudan, Tanzania and Zambia, where combined production grew by more than ten per cent in one year. If current investment projects become reality, Mozambique and Sudan alone could reach a combined production of two million tonnes by 2009. It can also be said that in some LDCs that are net importers (such as Bangladesh), the EBA appears to be stimulating investment, reviving sugar industries and leading to increased sugar production and exports at rates higher than internal consumption growth. This trend is likely to lead to more countries initiating exports to the EU.

74. This study has not uncovered any evidence of misallocation of resources to date, although without statements explaining why investors behave as they do, evaluating counterfactual situations (i.e. where investment would flow in the absence of the EBA scheme) is almost impossible. Nonetheless, the generous price differential offered by the EU appears not to be leading to the formation of high cost domestic production in regions that are not natural cane-growers.26 Mozambique, for example, has attracted FDI in its sugar industry and is among the lowest cost producers in the world.

75. Success in attracting FDI and encouraging domestic investment is limited to very few countries, however, and so cannot be simply a function of the EBA initiative and/or low production costs. One explanation of expanding investment activity appeals to the economic liberalisation process in which many LDCs are engaged. Indeed, partial liberalisation of the sugar market has in some cases forced domestic companies to undertake painful restructuring to stay competitive and this is both a cause and an effect of attracting investment. Looking at the positive effects of restructuring, local economies have benefited from a more dynamic sugar sector in terms of increased competition, better supply in the domestic market, improved technology, higher productivity, and superior know-how in the production process. Numbers of small suppliers have also increased, and some investors are assisting in the formation of independent mid-size landowners. More open and sophisticated market conditions and higher capital requirements are leading to a concentration of sugar production by a few large players with a significant market share. Such companies are diversified, vertically integrated, export-oriented, and belong to larger groups (or governments), which provide financial assurance.

25 New Age Business, http://www.newagebd.com/2004/aug/12/busi.html#2, 12th August 2004. 26 While Bangladesh is currently a high cost producer this is commonly attributed to inefficient sugar milling. There is little reason to believe that previously ineffective factory management and poor relations with suppliers cannot be overcome, causing ex-factory costs of production to fall dramatically. See EcoSecurities Ltd, Appendix A: Bangladesh Country Paper, http://www.cdmcapacity.dial.pipex.com/bangladesh/Bangladesh_country_paper.pdf, 2002.

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76. Yet while many LDCs have embarked on liberalizing their economies, other producers have taken measures to protect their local sugar markets and encourage domestic production. This gives rise to an alternative explanation of how investment can be stimulated and made to work for the local economy, as illustrated by the following three examples. 77. The Tanzania Sugar Act of 2001 gives powers to the Tanzania Sugar Board to regulate sugar imports so as to protect local producers.27 In October 2003, the Kilombero sugar company (majority owned by the South African firm Illovo) requested that the Sugar Board place greater restrictions than the then-current 10 per cent duty on industrial sugar imports so that it could increase the price paid by domestic industrial users from $400 to $480 per tonne. The company argued that the move was necessary to finance investment in rehabilitating an old sugar mill and developing new cane land to feed it.28 78. In early 2000, two groups of investors, the Mauritian-owned sugar company Sena Holdings and the South African Tongaat Hulett group, threatened to withdraw from Mozambique unless the government resisted IMF pressure to reduce tariffs on sugar imports, arguing that their investments could take ten years to realize a profit at world market prices (it must be observed that while foreign investment predated29 the announcement of the EBA initiative, Mozambique has experienced increased investment since 2001).30 As a result, the IMF revised its policies in December 2000, ending a dispute that began in September 1999.31 79. Finally, raw sugar imports were banned in Bangladesh between 1997-2002.32 The measure failed to prevent smuggling of lower quality sugar from India, however, and the Import Policy Order 2003-2006 removed all restrictions.33 Nonetheless, in a bid to encourage local farmers to expand sugarcane cultivation, the government raised the cane procurement rate in the second semester of 2004 from Taka 41.5 to Taka 44 for the mill gate price and from Taka 41 to Taka 43 for the field price.34 80. As observed, these countries have all successfully drawn FDI to their sugar industries and, as has been noted, investors in Mozambique and Tanzania insisted that a protected domestic market was essential to the survival and expansion of the industry. Furthermore, any future reduction of import barriers can be expected only after international competitiveness 27 The East African, http://www.nationaudio.com/News/EastAfrican/26112001/Business/Business15.html, 19 November 2001. 28 The East African, http://www.nationaudio.com/News/EastAfrican/03112003/Regional/Regional39.html, 3 November, 2003; Business Times, http://www.bcstimes.com/cgi-bin/bt/viewnews.cgi?category=1&id=1066988192, 24 October, 2003; IPP Media, http://www.ippmedia.com/ipp/guardian/2004/07/05/15004.html, 5 July, 2004; Tanzania Development Gateway http://www.tanzaniagateway.org/output.asp?articleid=114&cat=News%20Highlight&catID=5, date not provided. 29 Mozambique News Agency, AIM Reports, http://www.poptel.org.uk/mozambique-news/newsletter/aim170.html#story9, 1 December 1999, http://www.poptel.org.uk/mozambique-news/newsletter/aim184.html#story4, 25 May 2000. 30 Tongaat-Hulett, http://www.huletts.co.za/Press-03-06-09.htm 31 Government of Mozambique, Memorandum of Economic and Financial Policies of the Government of Mozambique for 2000–01, http://www.imf.org/external/NP/LOI/2000/moz/02/INDEX.HTM, 1 December 2000; Africa Action, http://www.africaaction.org/docs01/cash0101.htm, January 30th, 2001. 32 US Trade Center, Dhaka, Country Commercial Guide FY 2003/4, http://www.usembassy-dhaka.org/state/USTC/CCG%202003-2004.pdf, July 2003 33 Australian High Commission, Dhaka, Bangladesh Commercial Guide 2004/2005, http://www.bangladesh.embassy.gov.au/Bangladesh_Commercial_Guide_2004-05.pdf, July 2004- 34 http://www.thedailystar.net/2004/09/02/d40902050357.htm.

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and profitability has increased. There is very little to distinguish the investment regulations of Mozambique and Tanzania from similar LDCs and so it is arguable that a trade policy specific to the sugar sector was more important than an investment policy (as commonly defined) in attracting FDI. While other LDCs have taken measures to protect their markets and not obtained FDI or productivity-enhancing local investment, the EBA initiative does seem to have supported an infant industry approach to reviving the sugar industry in the above-mentioned countries (see Annexes 6 and 7). 81. It must be noted that the case of Bangladesh is somewhat different from that of Mozambique and Tanzania. While the Thai sugar conglomerate Ban Pong Group entered the country through a joint venture agreement, Bangladesh has experienced a sharp decline in foreign investment since 2001. This might be explained by poor implementation of several national investment policies.35 In the prevailing situation, the arrival of a Thai company is unlikely to be due to the existence (but effective non-implementation) of FDI incentive policies. It appears likely that in this country, the future evolution of the sugar sector will be shaped predominantly by the development of national business ventures through syndicated loans (see Annex 5). 82. In evaluating these explanations and the models on which they are based, problems related to both the privatization-liberalization and the privatization-protectionism routes to encouraging investment and stimulating production. In the course of any liberal privatisation process, FDI can displace local investment. Subsequent profits may be repatriated to the investing country with the result that local economies fail to capture entirely the benefits of increased competitiveness and exports. Competition between local and foreign investors and the final destination of net profits unfortunately lies outside the scope of this study and is a subject requiring further research. Yet regardless of whether foreign or local companies prevail in the privatisation process, concentrating ownership of production in the hands of private investors clearly has consequences for income distribution, the ability of government to provide rural employment and stimulate broad-based (agro) industrial development without crowding-out the private sector and, more generally, realise the wider objectives of the EBA regime.36 83. Turning next to the difficulties of privatisation and protectionism, the infant industry strategy (again regardless of whether the company is foreign or domestically owned) is rarely exploited to its best advantage. Import protection and lack of domestic competition are common to many LDC sugar industries yet improvements in international competitiveness are less so. Often governments simply shift support for inefficient public monopolies to still uncompetitive private ones. Unless actions are taken to drive the restructuring process forward, then as WTO negotiations and regional trade agreements increase the pressure to liberalise trade barriers and scale-back agricultural support such as marketing boards, LDC sugar production – whether financed by foreign or domestic investment – will come under threat. LDC sugar industries could find themselves unable to compete on domestic and international sugar markets and in a worst-case scenario, lose even the capability to deliver sugar to preferential markets. 84. Assessment of the effects of the EBA initiative would be incomplete without reference to two other potential problems: non-tariff barriers and trade distortion. As developed country tariff and quota barriers to trade in sugar decline, the use of product and process standards and technical regulations is likely to increase, as evidenced by many other agricultural products. Meeting quality control measures requires that producers make additional investments and so by increasing costs such regulations are effectively non-tariff

35 Industry Canada, Bangladesh Country Commercial Guide FY 2004: Invest Climate, http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr117680e.html 36 This subject is given greater attention in Chapter 4, particularly paragraphs 134-136.

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barriers to trade. Furthermore, health and safety standards are subject to change, which creates uncertainty about the conditions under which imports will be permitted. The tariff eliminations guaranteed through the EBA initiative thus address only some of the problems that LDCs have in exporting their products to the EU. Nevertheless, the limited supply capacities of LDCs, which initially promoted scepticism are giving way to a guarded optimism, supported by the emergence of potentially efficient companies capable of meeting quality controls and producing at competitive prices. 85. The high degree of regulation pertaining to the sugar market also appears to distort trade somewhat by encouraging under-invoicing and price discrimination. Some net exporters with protected markets and surplus stocks have sold more expensively in their domestic market than the foreign markets. Zambia has been criticised in the past by Kenya for exporting ex-factory at $280/t while selling to local buyers at $480/t. Overall, imports from less efficient producers and smuggling of agricultural commodities, particularly sugar, have experienced a dramatic increase in the last few years. This has distorted neighbouring markets and pushed some producers to bankruptcy. Reform of the wider rules-of-origin and the elimination of perverse incentives has therefore become a matter of some debate, since they tend to reduce the efficacy of the EBA initiative, but there is little reason to believe that the problem is insoluble. 86. For the LDCs that will be able to produce sugar at competitive prices by the year 2009 the questions on whether or not they will be able to transport their sugar to its final destination at a competitive cost remains. Given the limited number of cases and the high degree of heterogeneity between the different national sugar sectors, this study makes no attempt to judge whether openness or protection is the best way to further the development of LDC sugar industries. The modest findings noted here are the potential of FDI to galvanise sugar exports and the attractiveness of protected markets to foreign investors. Expanding on each of the factors outlined above is the task of Chapter 3. Section A surveys the natural conditions pertaining in each of the selected countries, Section B contains a brief discussion of LDC transport infrastructure and Section C profiles some export-competitive sugar producing companies. The extent to which the FDI-export relationship can be put to the service of the local economy and so make the EBA initiative consistent with the MDGs will be the subject of the policy recommendations put forward in Chapter 4.

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C. Effects of the EBA initiative on non-EBA ACP countries 87. The main focus of this research is sugar-producing LDCs. It is nonetheless important to assess briefly some impacts of the EBA initiative on non-EBA countries. 88. The eventual transfer of the entire SPS quota to the EBA countries is a significant loss for the ACP countries as a whole. At a price of €496.8/t and a volume of 217,298 tonnes, the SPS quota was worth almost €108 million in 2002/3. Its loss will be a particular blow to Zimbabwe, for example, where the quota currently accounts for 48.4 per cent of total exports, and Swaziland, where it totals 30.7 per cent. To take a regional example, the impact of the EBA initiative on the Caribbean sugar industries remains at the centre of discussion. CARICOM countries have a 450,000 tonne quota of Protocol Sugar and an additional 75,000 tonnes of SPS. EBA threatens the survival of the sugar industries in many small economies dependent on sugar by undermining the benefits enjoyed by CARICOM producers in the European Union. While the EBA intends to help LDCs, it is likely to have the opposite effect on some ACP sugar-dependent countries. As a result a reorganisation of the Caribbean industry is likely to occur with inefficient producers exiting the business. One possible outcome is an expansion of the regional refining capacity, as the EU continues to import refined sugar. This alternative is already being evaluated by Trinidad & Tobago.

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Chapter 3

CASE STUDIES OF SELECTED LDCs A. Natural resource endowments 89. Chapter 2 noted that low production costs, the existence of a reliable transport infrastructure and export-oriented production are critical in enabling countries to take advantage of the EBA initiative. The purpose of this Chapter is therefore to expand and attempt to explain the production and export trends observed earlier by more detailed reference to those three factors.

90. Among the most important factors determining export competitiveness of LDC sugar industries are natural resource endowments. With regard to the cultivation of sugar, endowments tend to vary widely among sugar producing LDCs. Some estimated data are given below for production costs in the relevant fourteen countries.

Table 2.1: Sugar production costs in selected LDCs

Estimation of costs, US$/t

source1 Source2 Source5 Source6

1 Sudan 2203 230 350 13 Congo >530 14 Madagascar 550 340 >530 1 Landell Mills Commodities Studies Ltd., ‘A world survey of sugar and HFCS field, factor and freight costs’, 1994 report. 2 Ulrich Sommer.’ Auswirkungen der Everything But Arms-Regelung (EBA) und der geplanten Wirtschaftspartnerschaftsabkommen (WPA) auf den Zuckermarkt der Europäischen Gemeinschaft‘, 2003 3 Kenana Sugar Company Report, September 2003, estimate 4 1994 value 5 agritrade, http://agritrade.cta.int/sugar/executive_brief.htm, January 2004 6 http://www.illovo.co.za/worldofsugar/internationalSugarStats.htm, September 2004

Sudan

91. Most of the sugar cane in Sudan is grown in large plantations owned by two agribusiness concerns – Kenana (in majority owned by Saudi and Kuwaiti interests) and the state-owned Sudanese Sugar Production Company. This allows producers to achieve maximum factory capacity utilisation, operate efficient irrigation systems and make optimal use of sugar by-products.

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92. Sudan has abundant land (more than 140 million ha are available in the Blue and White Nile areas) and plenty of water for irrigation. As a result, the cost of production is low at around US $220/t. The country expects to produce sugar at $130 to $160/t in the near future. Its efficient port and its ability to produce high-quality sugar further support Sudan’s export competitiveness.

Ethiopia

93. Ethiopia produced sugar only for its own consumption until a few years ago, but the opening of a fourth sugar factory in 1999 allowed it to start exporting. The older sugar mills are being upgraded, and further expansion of production and processing capacity are planned. The government expects that the country will be able to export 100,000 tonnes of white sugar a year. The cost of the production of sugar in Ethiopia is relatively low due to the abundance of cheap labour, the highest cane yield productivity in the world, 120 t/ha, and very suitable climate and soil conditions.37

Malawi 94. In a study conducted by the Trade and Industrial Policy Secretariat (TIPS), Malawi was mentioned as one of the SADC economies having a comparative advantage in sugar production,38 and a recent independent international survey rated Malawi as one of the world's lowest cost producers.39 Rural agriculture in Malawi is traditionally rain fed and hence seasonal. An acute land shortage has led to over-use, soil degradation and small yields. However, large-scale estate commercial production of sugarcane under irrigation, by South Africa’s Illovo Sugar Ltd., is now well established in Chikwawa and Nkhotakota Districts; in addition, there is a growing number of small- and medium-sized sugar producers.

Zambia 95. Flat land, ideal soil and climatic conditions, combined with Nakambala's access to secure water supplies for irrigation from the Kafue River, favour the growing of sugar cane at comparatively low costs. The sugar cane industry in Zambia is, according to a report by the U.S. Agency for International Development, favoured by ideal climatic conditions.40 In addition, large plantations of sugarcane allow for economies of scale; Tate & Lyle, from the UK, controls most sugar production and processing, and exports to the EU and the world market. Some industry analysts rank Zambia as the third lowest cost producer in the world.41

Bangladesh

96. Bangladesh currently produces sugar mainly for the local market. There are some 150,000 sugar cane planters, and a number of factory plantations of 800-2,000 ha. Most sugar mills do not have their own cane plantation and depend on a large number of small farmers

37 Ulrich Sommer.’ Auswirkungen der Everything But Arms-Regelung (EBA) und der geplanten Wirtschaftspartnerschaftsabkommen (WPA) auf den Zuckermarkt der Europäischen Gemeinschaft‘, 2003. 38 Trade and Industrial Policy Secretariat, Revealed Comparative Advantage in SADC Economies (Johannesburg 2000). 39 Illovo Sugar, About Us, www.ilovosugar.com/about/groupprofile.htm. 40 U.S. Agency for International Development, Comparative Economic Advantage of Alternative Agricultural Production Activities in Zambia (1999). 41 International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco, and Allied Worker's Association (IUF), 'Tate & Lyle Sells Zambia Sugar to Illovo Sugar' (February 2001).

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for their supply. As a result of fragmentation sugarcane yields are low at 20-21 tonnes per acre and production costs are high, about US $550/t. 97. Lower production capacity, poor recovery rate, low per acre yield causing inadequate sugarcane supply are the main reasons behind high local production costs, which reach around twice the international average. Other impediments to growth include frequent cyclones and floods, inadequate port facilities, insufficient power supplies, and slow implementation of economic reforms. Nonetheless, in 2004 national and foreign groups began investing massively in the sugar-refining sector.

Tanzania 98. According to Illovo (one of the world’s largest sugar producing firms from South Africa) Tanzania has excellent growing conditions, high yielding cane varieties and relatively low milling costs.42 The five sugar mills in the country currently produce far below full capacity but now that foreign ownership may have allowed significant additional investment in improved technology, the potential for a rapid increase in sugar production is strong.

Mozambique 99. The country has the capacity to produce at internationally competitive prices, as agriculture remains relatively low-cost through the abundant labour and the intensive utilisation of natural resources such as land and water.43 According to the Food and Agricultural Organisation (FAO) it is one of the world's low-cost producers.44 In a study conducted by SADC, Mozambique was mentioned as one of the SADC economies having a comparative advantage in sugar production.45 The High Commissioner of Mauritius in Mozambique stated recently that Mozambique has good conditions for producing sugar at competitive prices, which should enable Mozambique to produce sugar for a price of $180 per tonne, whereas Mauritius, despite its long experience in the area, produces sugar at $310 per tonne.46

100. In 2002, Mozambique exported 78,739 tonnes of sugar, earning the country a total of $18 million. Over half this figure - $9.9 million - came from the sugar sold to the European Union (9,140 tonnes) and the United States (13,248 tonnes).47 Since the announcement of the EBA scheme Mozambique saw an intensification of foreign investment in the sugar sector48), with companies from South Africa and Mauritius investing in four new sugar factories (in addition to two existing ones), which is set to increase production more than five-fold from 2001 to 2005.

Uganda

101. Uganda's soils were considered to be among the most fertile in the tropics. But nutrient depletion, erosion, and other signs of land degradation are increasing. “With two growing seasons a year, rates of depletion for crucial nutrients such as nitrogen, phosphorous, and potassium are among the highest in sub-Saharan Africa. Declining soil fertility is a

42 Illovo, International Sugar Statistics, http://www.illovo.co.za/worldofsugar/. 43 Allafrica.com, 'Sugar Industry Gets US$12m Boost' (September 2001), www.allafrica.com/stories/printable/200109130246.html. 44 South Africa's National Broadcaster, www.sabc.co.za/units/chanafr/news/001013.html. 45 Trade and Industrial Policy Secretariat, Revealed Comparative Advantage in SADC Economies (Johannesburg 2000). 46 ACIS, 'Sena company expands livestock production', www.acisofala.com/news_&_information.htm. 47 Mozambique News Agency, AIM Reports, No. 253, May 12th, 2003, http://www.poptel.org.uk/mozambique-news/newsletter/aim253.html#story5 48 Tongaat-Hulett, http://www.huletts.co.za/Press-03-06-09.htm

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particularly serious and widespread problem, which severely limits crop yields, including for sugar”. 49 The sugar produced by the three mills in the country is for domestic consumption, and Uganda remains a net sugar importer. The high local prices, protected by import barriers, and a long distance from the nearest port make it unlikely that Uganda’s sugar sector will benefit from the EBA.

Nepal 102. Sugar is one of Nepal’s leading crops. Nepal's productivity of major crops measured by yield per hectare has not increased at the pace of its South Asian neighbours.50 From having the highest yield rate in 1961-63 it fell to the lowest in 1997-99. Seventy per cent of landholdings are smaller than 1 hectare and 40 per cent is smaller than 0.5 hectare. Capacity utilization of the sugar mills is less than 30%, and the country imports more than a third of its sugar consumption from India. The sugar industry, however, hopes to revive the sector and turn it into a large generator of export revenue.

Myanmar 103. Although Myanmar has large amounts of uncultivated land and extensive fresh water, it has not fulfilled its agricultural potential.51 In 1998/99 Myanmar had an average sugarcane yield of 47 Mt/ha.52 Its sugarcane production exceeds domestic demand, although the absence of the capacity to produce white sugar has for a long time constrained export potential. A white sugar factory has been built recently and the country may be able to expand its sugar exports, which now are largely to the regional market.

Senegal

104. Up to the end of the 1970s, Senegal was in the forefront of African agricultural innovation and development.53 Since then, however, the agricultural sector has been in decline and producing huge government deficits, with agricultural productivity growth trends stagnant. The country produces sugarcane under irrigation, with a sugarcane yield of 120 t/ha. Production and milling is controlled by the privately owned Compagnie Sucrière du Sénégal, which produces some 85,000 to 90,000 tonnes of white sugar a year, sold in the local market.

Democratic Republic of Congo 105. One of the two factories, at Kiliba, was ruined during the civil war and there is at present little incentive to rebuild it. The production at the remaining factory, Kwilu Ngongo, is low, due to a low average yield of 46 t/ha;54 however, it is possible that the company will export under the EBA in order to obtain hard currency.

49 International Food Policy Research Institute, ‘Opportunities to Reduce Hunger, Poverty, and Land Degradation in the Highlands of Uganda’, www.ifpri.org/media/lfl_results.htm50 Suman K. Sharma, Food security in Nepal, http://www.ifpri.org/themes/sai/conf042402/sharma.ppt. 51 International Monetary Fund, Myanmar: Recent Economic Developments (1999), http://www.imf.org/external/pubs/ft/scr/1999/cr99134.pdf. 52 Ibid. 53 Kelly, V.B. Diagana, T. Reardon, M. Gaye, and E. Crawford, Cash crop and foodgrain productivity in Senegal: Historical view, new survey evidence, and policy implications (1996), http://www.aec.msu.edu/agecon/fs2/polsyn/number7.pdf 54 Ulrich Sommer. ‘Auswirkungen der Everything But Arms-Regelung (EBA) und der geplanten Wirtschaftspartnerschaftsabkommen (WPA) auf den Zuckermarkt der Europäischen Gemeinschaft’, 2003

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